Monday, July 13, 2009

Meredith Whitney Advisory Group is upgrading Goldman Sachs (NYSE:GS) to Buy with a 12 month price target of $186.

Firm notes their more bullish outlook on GS shares is deeply rooted in their sustained bearish stance on the US economy and state of US financials at large. Specifically, they expect a tsunami of debt issuance from federal/sovereign, state, and local governments ramping up debt issuance to fund woefully underfunded budget gaps. In addition, they expect corporate debt issuance to be at least 60% as strong as peak cycle levels reflecting sizable debt maturity rolls. What’s more, given fewer market players, not only is GS benefiting from market share gains on these products but more widely in derivatives products.

To be clear, the firm notes reasons for liking GS stock today are drastically different than any they have had recommending the stock on and off over the past decade. In the past, GS shares were a great play on equity markets and expansive global GDP. While that may still hold true down the line, their thesis today is that they expect GS to be the key competitor in some of the most unpredictable markets: government, corporate, and municipal debt. With those markets, GS handily layers on its suite of derivative products. For that, they expect GS to earn roughly a 16% ROE through 2011. Using those modest return hurdles, the firm derives estimates that are roughly 30% higher than Street consensus and a 12 month forward book value per share in excess of $124. Firm's price target is based upon a combination of a 1.5x multiple to forward book value as well as a 9.5x multiple of 2010 estimated EPS.

Notablecalls: Meredith is well, Meredith...hate it or love it..the mvp of Wall Street. She comes out and upgrades GS just one day before earnings. You have to love her for it.